Etihad Airways and Air Arabia have signed an independent joint venture agreement to create the UAE capital’s first low-cost carrier, to operate out of Abu Dhabi International Airport.

Analysts have drawn comparisons between the new airline and the successful partnership operated in neighbouring Dubai between Emirates airline and Flydubai.

Tobias Rueckerl, CEO of London-based Advanced Aviation Consulting (ADAVCO), told Arabian Business: “In my opinion the cooperation between Etihad and Air Arabia is a logical step, also strengthening the position of Abu Dhabi in the competition against Dubai and its successful airline Emirates. This step shows moreover that there is a strong competition between the emirate’s families in the UAE.”

Competitive pressure

Both Flydubai and Sharjah-based budget airline Air Arabia, which also has hubs in Ras Al Khaimah, Casablanca and Alexandria, have similar routes in the Middle East, North Africa, the Indian subcontinent, Central Asia and Europe.

The battle for emerging markets, such as Pakistan, India, Russia, the CIS and Eastern Europe, will now intensify according to Andrew Charlton, managing director of the consulting firm Aviation Advocacy.

He said: “It will certainly add competitive pressure to an already very competitive market. Flydubai showed that there are a number of markets that were underserved. This will introduce competition into a number of those markets.”

John Strickland, director of JLS Consulting, said the Emirates/Flydubai model was definitely one worth replicating for what will be the UAE’s fifth airline and its third low-cost carrier.

He said: “This is quite a new step. We’ve seen in Dubai with Emirates and Flydubai the massive additional number of connections they’ve been able to create with that partnership. I think similar success can be achieved in the Etihad and Air Arabia partnership.”

Restructuring process

Etihad, which has been undergoing restructuring since late 2017, narrowed its losses in 2018 to $1.28 billion, from $1.52bn the previous year.

Along with its 2016 losses, that adds up to total losses of $4.67bn over three years, prompting the company to scrap dozens of orders on aircraft.

In late 2017, the company appointed Tony Douglas, a former British defence official, as its chief executive officer and launched a five-year restructuring process.

Strickland said: “Etihad has invested in financially weak airlines such as Air Berlin and Jet Airways, which have subsequently failed. Air Arabia is quite the polar opposite, a successful airline, the most profitable low-cost airline in the Gulf.”

It is anticipated that Etihad will benefit from the tie-up as it will receive feeder traffic to its Abu Dhabi International Airport hub and have the chance to balance their network by transferring weaker routes to the new carrier in the capital.

“Weaker routes might be a loss maker for a legacy carrier but could be operated profitable by an LCC (low-cost carrier),” said Rueckerl.

“Etihad could leave the narrow body operation to the new venture and focus on its core expertise, the mid-to-long range legacy operation.”

Critical mass

And Saj Ahmad, chief analyst at StrategicAero Research agreed that it was a win-win situation for the Abu Dhabi carrier. “Etihad clearly gains the most. It benefits from Air Arabia’s popular brand and low-cost economics without having to pay a penny for setting that up. Further, it brings to Abu Dhabi International a big LCC that otherwise doesn’t exist and negates the need for passengers to go to Sharjah for an Air Arabia flight.”

Low-cost carriers accounted for a 17 percent share of seat capacity to and from the Middle East in 2018, compared to only 8 percent in 2009.

John Grant, Senior Analyst at OAG, said the challenge for the new airline would be to minimise costs at every stage of the business.

“If you can manage the cost and achieve quick critical mass then new start-ups have a chance. And since the network is already in place as long as they manage the transition out from the current network, reducing unit costs where ever possible then this has a chance of succeeding,” he said.